Bracing for Disruption — Gas Distribution Utilities Must Prepare for Clean Energy Transition
Without a doubt, electric utilities have made significant progress in recent years in taking actions to reduce the sector’s impact on the climate crisis. Power sector companies are moving away from coal, setting net-zero or other substantial greenhouse gas emission reduction targets, and making strides to adopt renewables, storage, and demand-side management approaches. This has contributed to power sector emissions falling 27 percent since 2005.
But what about gas distribution utilities? What are they doing? What should they be doing?
As You Sow’s 2018 report, The End of the Line, discusses gas distribution utilities’ role in mitigating emissions of methane — the main component of natural gas and a potent greenhouse gas with 86 times the warming potential of carbon dioxide. The report outlines best practices companies can and should take to prevent unnecessary leakage from operations at the end of the gas supply chain. Investor engagement with utilities has seen great progress in such areas. Specific steps companies have taken include:
Enhancing methane-related disclosures.
Setting targets to reduce methane emissions.
Joining industry initiatives that encourage better methane management such as the Natural Gas Supply Collaborative or ONE Future.
Publicly supporting the regulation of methane.
Pressuring upstream suppliers to practice better methane management. For instance, Southern Company recently purchased gas through a new responsible gas program.
While critical in the near term to buy us time, actions to reduce methane emissions will not be enough to bring the natural gas distribution sector into alignment with the vital 1.5 degree Celsius warming target established by the Paris Climate Agreement. Even utilities with net-zero targets that include gas distribution do not yet cover the full climate footprint of that gas, but rather solely focus on direct Scope 1 emissions from operations. Unacceptably high emissions throughout the gas value chain — including upstream venting and flaring and downstream combustion (in homes for cooking and heating) — make long-term use of the fuel source incompatible with Paris goals.
Recognizing this difficult truth and given that burning gas for heating and cooking in buildings represents a significant portion of the nation’s greenhouse gas footprint, some states and localities are moving to incentivize the electrification of buildings. Experts have found that building electrification shows great promise to help meet stringent decarbonization goals, beginning with new construction. The question then remains: What to do about existing gas assets and ongoing investments?
States are beginning to grapple with this issue. For instance, in early 2020, the California Public Service Commission launched a rulemaking to examine stranded asset and rate-setting issues related to managing “the state’s transition away from natural gas-fueled technologies.” Some cities in California (and other states) have already banned gas hookups for new construction, but questions remain regarding who should pay for existing and planned gas infrastructure. In Massachusetts, Attorney General Maura Healy recently called on the state’s Department of Public Utilities to investigate “the way gas utilities do business in our state” as Massachusetts moves to meet its clean energy goals.
Outside of waiting for policy, how should gas utilities prepare? As noted in As You Sow and Energy Innovation’s 2020 report Natural Gas: A Bridge to Climate Breakdown, there are many steps utilities can take to reduce reliance on gas, especially for hybrid utilities that provide electricity and gas for distribution.
We are beginning to see stark differentiation in how companies with significant gas fleets approach this issue. After filing shareholder resolutions expressing concern over the risk of stranded gas assets, Sempra and Dominion blocked our resolutions from going to a vote. (A similar proposal was successfully withdrawn with Southern Company when the company committed to providing more information on how it is reconciling future gas plans with its net-zero ambition). While Sempra prevented shareholders from weighing in on the topic, SoCalGas — the gas distribution subsidiary of California-based Sempra — has continued to face criticism for its funding of questionable lobbying groups to drum up support for natural gas. While the company suggests substituting “Renewable Natural Gas” and hydrogen will reduce the climate impacts of existing fossil gas assets, investors are skeptical. Experts have called into question the availability, economics, general feasibility, and carbon-reducing potential of such fuels, calling them “false” solutions.
In contrast, a successful and productive negotiation allowed As You Sow to withdraw its methane-focused shareholder resolution with Spire after sparking important discussions within the company. Following through on its commitment, Spire’s 2019 Corporate Responsibility Report (released in spring of 2020) includes greatly improved disclosures regarding the company’s methane management practices. Taking its commitment a step further, the report notes, “by midcentury, we’re committed to being a carbon neutral company.” While the company has yet to clarify how it plans to achieve this (and we hope to see further detail in next year’s report), this statement sets Spire apart as the first gas-only utility to make such a commitment. Setting targets is a critical means to ensure utilities have tough but necessary internal conversations about how to evolve with, and productively contribute to, the clean energy transition underway.
As investors, we don’t expect any natural gas utility to have all the answers now as to how it will evolve and thrive in a decarbonizing world that enables us to avoid the worst impacts of the climate catastrophe. We do expect gas utilities to recognize change is coming and to begin the hard work of questioning and planning for a new energy future.